An Embarrassing Confession About Peloton

Lou Basenese

Tuesday, October 19, 2021

I have a confession to make — and it could make you a ton of money.

You see, during the throes of the pandemic, I made the dumbest investment of my career.

I knew it was a bad move even at the time. But I did it anyway. And now I’m paying the price. Literally.

The good news? For me, there isn’t any good news. But for you, my dumb move could net you a handsome profit.

Let me explain...

Peloton Mania

It’s no secret that global lockdowns sent demand for at-home fitness equipment through the roof.

If you strolled into any DICK'S Sporting Goods, Inc. (DKS) in mid-2020, the entire exercise section of the store was completely barren.

It was a real-world nightmare for all the Arnold Schwarzenegger wannabes.

Of course, the poster child for Covid-19 fitness-equipment mania was undeniably Peloton Interactive, Inc. (PTON).

Peloton — the maker of stationary bikes and treadmills with video screens that allow you to livestream classes — went from being a busted IPO in September 2019, to a Wall Street darling by the end of 2020.

During that period, shares zoomed from a low of around $22 to a high of $171. That’s a tidy gain of over 675% for any investors that top-ticked the stock.

So what changed the stock’s fortunes?

Put simply, demand for Peloton bikes skyrocketed, more than doubling between 2019 and 2020.

And sure enough, yours truly was one of the bonehead customers that plunked down nearly $3,000 for nothing more than a stationary bike with an internet connection.

Click Bait

I remember pushing the button to order my Pelton and telling myself, “I’m never going to use this thing.”

It’s not because I’m averse to exercise. To the contrary, I’m a lifelong athlete that stays extremely active. I get up every day at 4:40 am to go to the gym, and many days, I also do a workout in the afternoon.

But in that moment of desperation for something shiny and new, I violated my own investing rule: never invest in fads!

Instead, I took the bait and gladly accepted a ridiculously long wait time to receive my high-priced bike with an overpriced TV mounted to it.

To date, I’ve used my Peloton a whopping two times. It sits in my house gathering dust, just like the chotskies sitting on my shelf from my last trip to Mexico.

Even worse, my Peloton dust collector costs me $40 per month, so I can get access to the digital content of other people riding stationary bikes with internet connections.

As a tech analyst, I should’ve known better.

While there’s a bonafide group of raving Peloton fans, there’s nothing special about this technology to attract the masses. This is a classic niche investment.

That means, once all the biking enthusiasts and Covid-19 suckers like myself have made our purchases, demand is destined to crash and burn.

For proof, look no further than the company’s most recent results...

Serious Downshift

Peloton’s sales fell 25% quarter-over-quarter through June 30, 2021, dipping below the $1 billion mark. And they’re headed lower still.

In fact, management guided for sales of only $800 million in the quarter ended September 30, 2021. That guidance was almost $200 million lower than analysts' estimates.

Here’s the thing: Peloton is scheduled to report official results for the most recent quarter on November 4. And I fully expect the numbers to be even worse than the updated guidance.

Why?

For one thing, management keeps slashing prices. That’s a dead giveaway that demand is eroding quickly. And it’s a financial trick that will only gin up incremental demand because price isn’t the real issue here. The issue is a limited addressable market!

Not to mention, you can’t slash prices and boost margins. It defies the laws of economics. So even if the price cuts spark a boost in demand, it promises to be temporary and unprofitable.

What’s more, I’m certain there are other customers like myself that regret their purchase every day, and will be cancelling their monthly subscription for digital content. That means Peloton’s attractive recurring revenue base that analysts love to brag about is going to start eroding, too.

Add in competition from the likes of Amazon.com (AMZN) with its new fitness platform, Halo Fitness, and it’s all but guaranteed that Peloton’s sales and profits will keep downshifting quarter after quarter.

And since share prices ultimately follow earnings, look for the sell-off in Peloton’s stock to continue.

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Ahead of the tape,
Lou Basenese
Lou Basenese

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